Is it really time to “UnTether”?
Tether is the company behind the most widely used stable coin in DeFi by some margin, USDT. Its current market cap is approximately $106.15 billion USD at the time of writing. It’s gold stable coin, Tether Gold, has a market cap of approximately another $560 million USD. This company holds a lot of sway in the crypto markets as the primary service provider for stable coins in many DeFi ecosystems. This makes their services essential. On a fairly recent episode of Bankless, Tether’s CEO Paolo Arduino was talking about the amount of US debt that is currently owned by the company. He said that the company owns slightly more US government debt than the UAE and slightly less than Germany. This shows that the company has similar reserve levels to major economic nations, the extent to which I found quite surprising.
This really got me thinking about the amount of exposure that I have to USDT in my portfolio. In my case, exposure mostly comes from my Injective bag. There is a lot of FUD spread about Tether and I wondered if this is simply just conjecture or if there is something more to this. This led me to an episode of Crypto Critics Corner where they seemed quite certain that the doom of Tether was an inevitability. What would that look like for DeFi if we were to lose our largest stablecoin?
According to the claims on Tether’s website at the time of writing, all assets are backed 1:1 with a fiat asset. This seems plausible if backed by audit reports. Reported numbers suggest that things are going pretty well business wise. However, reports that Tether has managed to reach over $100,000,000,000 USD in assets without ever being sufficiently audited abound (e.g. here by Protos). It is also detailed that they have had ties to many failed companies in the industry over the years (e.g. Alameda Research; Three Arrows Capital; and, Celsius most recently). In a nutshell, it is hard to find a clear picture of their standing as a company. Their next biggest competitor in the stable coin market is about a quarter of their size, Circle’s USDC. However, in the case of USDC, reports seem a lot more transparent through a complete historical record of audits. In the USDT versus USDC debate, USDC appears to have a cleaner image due to the more transparent nature of its regular audit structure. USDC also has a record of compliance and recently announced that it was pulling its products from the Tron blockchain.
Personally, I’m unsure whether Tether is fully backed. This is due to the lack of a transparent audit record being visible via their website. However, I do think that they play an incredible role in DeFi at present. While there are plenty of viable stable coin options that are more decentralized than USDT or USDC (e.g. DAI; FRAX; DJED; LUSD; crvUSD; Gho; USK; and, ERN), most investors seem to prefer the idea of a centralized stable coin. I’d suggest that USDC is fully regulatory compliant in the US whereas USDT is mostly compliant, note that this differs from “non-compliance” as is often suggested in sensationalized media.
Its also interesting that this slightly lower level of perceived compliance results in four times the market share for USDT over USDC. Personally, I prefer to invest in decentralized stables where possible just to reduce the risk of my assets being frozen in the future. The problem with that statement being that decentralized stable coins are often backed by other crypto assets and it can be complicated to know how the volatility of markets will affect their backing (UST’s demise being the worst ending for this asset type). Choosing between stable coins does not seem to be as simple as centralized versus decentralized, USDT versus USDC, or even a happy medium such as DAI or FRAX. Ultimately, investors essentially need to assess the use case of each stable coin asset that they invest in and figure out which assets work for their strategies in each specific DeFi protocol/blockchain play that they employ.
To return to the question posed in the title of this article, no, I don’t think it is time for me to untether. Simply because it is so prolific across the market and I want to make money. There are really great opportunities offered by protocols that utilize USDT on Injective alone (e.g. DojoSwap; Helix; Hydro; Mito and Neptune). I would hate to miss out on wealth creation because of the fear of risk based on sensationalized media. Of course, it is possible that Tether could collapse, this is a distinct possibility. But as part of a diversified stable coin portfolio, it is a risk that offers much in the way of potential reward. That said, if pressed, my personal preference is for chain native decentralized stable coins (e.g. DJED). This is simply because they are assigned a very specific domain to work in and there is a reduced risk of market overstretch on the part of the issuer due to its concentrated market size.
I do understand that broadly speaking, the market does not always reflect my sentiments here though. It seems to me that most retail investors wish to invest in large companies with brand recognition. This starkly contrasts with the homegrown crypto native solutions that exist in DeFi. As the market matures, the influence of centralized actors such as Tether and Circle will continue to grow. Naturally, the share of the market in centralized assets will also grow. Personally, I will invest in USDC and Tether to a minimal degree but will balance this with investments in decentralized assets such as sUSD, crvUSD, LUSD, DAI and FRAX. The concern here is that the fall of a company the size of Tether would have profound contamination across the crypto markets. This means that it is important to remain aware that centralization in crypto is a trend that will continue to grow because the inverse of this would be industry shattering. As opposed to untethering we need to diversify across the centralized-decentralization cline as much as we do across volatile and non-volatile assets. We need to educate ourselves across the continuum of blockchain products on offer and ensure that we are well situated to embrace future market trends.
Disclaimer: this is NOT financial advice. I’m a cow and I like to eat cereal. Any knowledge gained from this post is merely incidental and you are responsible for your own financial decisions. Make investments wisely and make sure to do your own research.
Other articles of interest: The Problem with NFTs; Investing in Liquidity Pools; Kayfabe and Cryptocurrency; and, DePIN.
